Even Deficit Hawks Support Big Spending to Fight the Virus Slump

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(Bloomberg Businessweek) -- In ordinary times, conservative economists say they are worried about big federal budget deficits and rising debt. These are not ordinary times. The U.S. economy is in crisis, with entire sectors virtually shutting down to stave off the spread of the highly contagious virus that causes the lung disease Covid-19.

I emailed several of the best-known conservative academic economists in the U.S. to ask what they think the federal government should do to counteract the economic effects of the fight against Covid-19. Restraining the deficit was nowhere near the top of their list. Here are some of their replies:

Gregory Mankiw of Harvard, who was a chief economic adviser to Republican President George W. Bush and the author of a bestselling introductory economics textbook:

“There are times to worry about increasing government debt. But a crisis like the current pandemic is not one of them.”

Glenn Hubbard, former dean of Columbia Business School, who was also a chief economic adviser to Bush:

“Policy makers should emphasize funding for health infrastructure and support for state Medicaid programs. Aid to affected industries through loan guarantees, etc. (cf., actions right after 9/11) is also important.

“While policy can’t offset the supply shock, it can make sure demand does not crater. Sending checks to low- and moderate-income individuals would be helpful and should be possible. Markets are pricing in dire scenarios because of falling confidence. A major infrastructure program commitment would reassure businesses about future demand — projects needn’t be ‘shovel ready’ for that to work. Bipartisan support there too should be possible. While profligacy is not the goal, policy makers should prioritize reassurance over the near-term deficit.”

Alberto Alesina of Harvard, who argued in 2009 and 2010 that austerity can stimulate economic growth by calming bond markets and lowering interest rates:

“I am not a deficit hawk. I am an economist who understands the prescriptions of optimal fiscal policy, which are the following: run massive deficits when there is a temporary need like now with the virus and reduce them in normal periods of growth. The fact the second prescription is rarely followed implies that many countries arrive at a crisis time with too much debt making the necessary deficit in a crisis more difficult. … The issue of austerity and its effect is irrelevant now because we don’t need austerity now.”

Today on Bloomberg TV, Harvard’s Kenneth Rogoff—who has warned about mounting debt in books and articles with Carmen Reinhart, and who last year dismissed deficit-friendly Modern Monetary Theory as “nonsense”—said the U.S. needs $500 billion to $1 trillion in fiscal stimulus “for starters.” He added: 

“A lot of that needs to be directed at the lower-income earners because they would spend it fast, it would be politically the most palatable, and it probably wouldn’t be the last thing we did.” Speed is key, he said: “The perfect storm that creates these really disastrous financial crises often involves having a government at war with itself, caught on its back, very often before an election.”
In a subsequent he mail, he said:
The whole point of maintaining sound government finances is to be able to aggressively confront extremely severe out-of-the-box shocks such as the present one.

Meanwhile, none of this has happened. President Trump supports a cut in payroll taxes, which would get more money into the hands of working people and support the economy. But that wouldn’t help people who are out of work because of the virus. House Speaker Nancy Pelosi is pushing a plan that includes free coronavirus testing, 14 days of paid sick leave, increased funds for Medicaid, and enhanced unemployment benefits and food aid. That’s a good start, but it’s not the kind of massive stimulus that the U.S. economy needs to offset the sharp decline in spending by consumers and businesses.

Economists at BofA Global Research, a unit of Bank of America Merrill Lynch, wrote in a note to clients today that the stimulus that’s in the pipeline is “not sufficient.” They lowered their growth forecast to a negative 0.5% annual rate in the second quarter, which they characterized as “flirting with recession.” They wrote, “Greater funding to offset lost compensation and support businesses staying afloat will curtail the short term economic pain and help reduce any long lasting damage the outbreak may have on the economy.”

The counterintuitive point here is that deficits are not an unfortunate byproduct of efforts to fight the economic consequences of the pandemic. Deficits are, for the moment, good and necessary. Here’s why: One person’s spending is another’s income. Now that Americans aren’t spending on a million things, from plane tickets to hairdressing appointments, incomes of businesses and individuals are plummeting. That can’t go on for very long before there are widespread bankruptcies and unemployment. Someone or something needs to prop up economywide spending—and thus incomes—until the private sector can get back on its feet. That’s the natural role of government: spender of last resort.

To put it another way, the government needs to put more money into the economy through spending than it takes out through taxation. That’s the very definition of a deficit. The conservative economists quoted above might not agree with every jot or tittle of this argument, but they do seem to agree that right at the moment, red ink is just what the U.S. economy needs.

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